Reflation is the act of stimulating the economy by increasing the money supply or by reducing taxes, seeking to bring the

economy (specifically price level) back up to the long-term trend, following a dip in the business cycle. It is the opposite of disinflation, which seeks to return the economy back down to the long-term trend. Reflation, which can be considered a form of inflation (increase in the price level), is contrasted with inflation (narrowly speaking) in that "bad" inflation is inflation above the long-term trend line, while reflation is a recovery of the price level when it has fallen below the trend line. For example, if inflation had been running at a 3% rate, but for one year it falls to 0%, the following year would need 6% inflation (actually 6.09% due to compounding) to catch back up to the long-term trend. This higher than normal inflation is considered reflation, since it is a return to trend, not exceeding the long-term trend. This distinction is predicated on a theory of economic growth where there is long-term growth in the economy and price level, which is widely accepted in economics. Just as disinflation is considered an acceptable antidote to high inflation, reflation is considered to be an antidote to deflation (which, unlike inflation, is considered bad regardless of its magnitude). Reflation is an economic term referring to stimulating measures taken to lessen or stop the effects of deflation. Reflationary measures can consist of fiscal policy (lowering taxes) or monetary policy (changing money supply or lowering interest rates). For example, the Federal Reserve may choose to lower interest rates to jump start a weak economy common in deflationary periods. "Reflation" is simply "government monetary action that causes a reversal of deflation." Reflation v/s inflation Many people worry about inflation (i.e., a decline in real value of the dollar). Because people expect inflation over the next few years, it is likely that we will have to pay more for a Big Mac ten years from now than we are paying right now. That's too bad if you're sitting on a pile of cash; over time, inflation will gradually make your cash worth less. If you're sitting on a pile of debt, though, you might want inflation to reduce the real value of your debt (assuming that your income rises to keep pace with inflation). But deflation (i.e., an increase in the real value of the dollar) is also a problem. When the dollar rises in value in real terms, that means that prices are falling. Falling prices will also lead to falling salaries. Fortunately, reflation (the reversal of deflation) is one of the easier tasks the Federal Reserve can perform. To decrease the value of the dollar (and thereby reverse deflation), the Fed needs only to release more dollars into the economy. By purchasing U.S.

Treasuries on the open market, or otherwise increasing the supply of Federal Reserve Notes (aka, dollar bills) in the market, the Fed can swiftly decrase the dollar's value. Ronald Reagan famously said that, "The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help.'" [Source: "Ronald Reagan Quotes - The Quotations Page." The Quotations Page - Your Source for Famous Quotes. N.p., n.d. Web. 20 Nov. 2010. ] In the case of reflation, though, the government can offer us some useful assistance.

INFLATION In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.[1] When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money a loss of real value in the internal medium of exchange and unit of account within the economy.[2][3] A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.[4] Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation is rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring that central banks can adjust real interest rates (intended to mitigate recessions),[5] and encouraging investment in non-monetary capital projects. Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.[6] Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.[7][8] Today, most economists favor a low and steady rate of inflation.[9] Low (as opposed to zero or negative) inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy.[10] The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control monetary policy through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.[11] One word: Inflation. Like aging or weight gain

But the effects of inflation are huge. And it doesnt just affect areas like our salaries and the cost of purchasing a new home. Inflation hits us from every angle. Food prices go up, transportation prices increase, gas prices rise, and the cost of various other goods and services skyrocket over time. All of these factors make it absolutely essential that you account for the huge impacts that inflation can have on your long-term savings and ability to fund your golden years of retirement.

Causes of Inflation
So what exactly causes inflation in an economy? There is not a single, agreed-upon answer, but there are a variety of theories, all of which play some role in inflation:

1. The Money Supply

Inflation is primarily caused by an increase in the money supply that outpaces economic growth. Ever since industrialized nations moved away from the gold standard during the past century, the value of money is determined by the amount of currency that is in circulation and the publics perception of the value of that money. When the Federal Reserve decides to put more money into circulation at a rate higher than the economys growth rate, the value of money can fall because of the changing public perception of the value of the underlying currency. As a result, this devaluation will force prices to rise due to the fact that each unit of currency is now worth less. One way of looking at the money supply effect on inflation is the same way collectors value items. The rarer a specific item is, the more valuable it must be. The same logic works for currency; the less currency there is in the money supply, the more valuable that currency will be. When a government decides to print new currency, they essentially water down the value of the money already in circulation. A more macroeconomic way of looking at the negative effects of an increased money supply is that there will be more dollars chasing the same amount of goods in an economy, which will inevitably lead to increased demand and therefore higher prices.

2. The National Debt

We all know that high national debt in the U.S. is a bad thing, but did you know that it can actually drive inflation to higher levels over time? The reason for this is that as a countrys debt increases, the government has two options: they can either raise taxes or print more money to pay off the debt. A rise in taxes will cause businesses to react by raising their prices to offset the increased corporate tax rate. Alternatively, should the government choose the latter option, printing

more money will lead directly to an increase in the money supply, which will in turn lead to the devaluation of the currency and increased prices (as discussed above).

The Good Aspects of Inflation

In a fact that is surprising to most people, economists generally argue that some inflation is a good thing. A healthy rate of inflation is considered to be approximately 2-3% per year. The goal is for inflation (which is measured by the Consumer Price Index, or CPI) to outpace the growth of the underlying economy (measured by Gross Domestic Product, or GDP) by a small amount per year. A healthy rate of inflation is considered a positive because it results in increasing wages and corporate profitability and keeps capital flowing in a presumably growing economy. As long as things are moving in relative unison, inflation will not be detrimental. Another way of looking at small amounts of inflation is that it encourages consumption. For example, if you wanted to buy a specific item, and knew that the price of it would rise by 2-3% in a year, you would be encouraged to buy it now. Thus, inflation can encourage consumption which can in turn further stimulate the economy and create more jobs NEGATIVE ASPECTS The main negative effects of inflation are: (1) It redistributes income from people on fixed incomes (that do not rise with inflation) to people on variable incomes (that do rise with inflation). Since most people with fixed incomes are poor (for example, receive social benefits that do not rise in line with inflation), and people with variable incomes are relatively richer, the effect of income is to redistribute income from the poor to the rich. (2) Inflation erodes international competitiveness. Exports cost more abroad. This can cause a decrease in demand for exports. That in turn can lead to a decrease in demand for the currency and to a devaluation of the currency. The devaluation may restore exports, but at the cost of making imports more expensive, thus increasing inflation again! It is because inflation erodes international competitiveness that most governments make controlling inflation the central pillar of their economic policy.